By Dennise Williams, Staff ReporterBEAR Sterns, the international rating agency says Jamaica's latest attempt at social partnership in the form of Partnership for Progress has played a critical role in their assessment of the country's prospects.
It formed part of their reason for giving Jamaica's bonds an outperform rating. In the 'Sovereign Latin America Update' published by the rating agency on March 1, they state, "The Partnership for Progress (PFP) has 'bought' the country at least another year. We believe that the prospective 12-month default risk is significantly lower than it was six months ago. Jamaica remains vulnerable to a failure in implementation of the PFP, a backlash from unions, fiscal underperformance in fiscal 2004-05, and any number of unpredictable exogenous shocks." But this is not the first time social partnerships have been attempted in Jamaica, as there were attempts in the 1970s and 1980s. However, Bear Sterns states, "There are early signs that this one will work." According to the agency, the reasons that PFP will work are:
Prime Minister P.J. Patterson has endorsed the process and has a strong political incentive for seeing it work. He has announced that he will retire from politics before the next general election, meaning that he plans to leave office within the next four years. He has a strong incentive to see Jamaica stabilise.
The unions representing most of the central government and quasi-public sector (teachers, etc.) have agreed to a two-year contract for three per cent wage increases per year. This is very significant. Inflation in 2003 spiked to 14.1 per cent (from 7.3 per cent in 2002), and the target for 2004 is nine per cent, so the three per cent nominal increase represents a substantial real wage decrease. Normally, following an inflation surprise like the one witnessed in 2003 (the 2003 inflation target was seven per cent), the unions, which are strong in Jamaica, would have driven an extremely hard bargain.
Senior people in the financial industry are some of the main proponents of this plan. This is important for external bondholders. Because of the high percentage of Jamaican ownership of external bonds, a financial meltdown scenario requires local holders to sell en masse. Given their sponsorship of the PFP, this does not seem imminent. Major players in the financial and private sector declined to comment on this article. Bear Sterns also analyses the structural reforms that PFP proposes. In their opinion, "the reforms of various sorts could increase the potential growth rate of Jamaica, as well as provide the government with more fiscal flexibility at the margin." The PFP proposals, as analysed by Bear Sterns, include:
DOMESTIC DEBT SWAP
A proposal is now in front of the Ministry of Finance from the local financial community that would swap high interest rate debt maturing in the near future to low coupon debt."
It is understood by the Financial Gleaner that the 'debt swap' would consist of replacing high interest local currency debt with US dollar denominated indexed bonds. Bear Sterns is of the opinion that the swap would save the government money in the near term of two years. The report continues to state that, "the Ministry of Finance is cool towards the idea because it is worried about the 'optics' of a debt swap appearing to be coerced in some way that might cast doubt on its willingness to pay. In addition, interest rates are falling aggressively, perhaps reducing the need for the cash flow relief. We do not believe that the programme hinges on this swap occurring, though the signal this would send to other segments of society that are making sacrifices would be a positive one."
Monetary Policy Committee
"At the request of the private sector, the feasibility of a monetary policy committee is being studied. The private sector believes this might reduce the volatility of monetary policy and act as a check and balance mechanism on the Bank of Jamaica management and board."
DIVESTMENT
"Jamaica has privatised nearly all of its traditional state-owned enterprises (telecom, electricity, et al), but it has acquired a portfolio of assets from its late-nineties interventions in the financial sector. These assets include everything from loans to real estate. The value may be in the order of $10 billion. In the context of a domestic stock of roughly $400 billion, this is not enough to solve the debt problem, but getting the assets in the hands of the private sector would likely lead to higher investment and better management."
TAX REFORM
"A committee is studying the tax system trying to figure out how to extract more tax revenues without raising tax rates, which are high already. Basically, this means reducing tax evasion."
